Another Day - Another Dollar

Another busy day at work - for which I am very thankful - so little time to do much here. I noted yesterday that credit card debt was coming on as an increasing problem. It appears I was not off mark. Credit card defaults at a 20 year high - go figure. And one of the worst default rates is for Citigroup. Seriously people, did this company do any risk analysis? Did they check credit ratings of anyone? And, nonetheless, we are propping up such a "stellar" organization with many billions of dollars.

http://www.calculatedriskblog.com/2009/03/credit-card-defaults-at-20-year-high.html

Mark to Make Believe

The FASB is contemplating allowing more relaxed mark-to-market rules, which is something that Buffet has called for.

http://www.calculatedriskblog.com/2009/03/fasb-to-propose-changes-to-mark-to.html

Now I will not retread all the traffic on how mark-to-market was great on the way up so we need to live with it on the way down. I fundamentally see how it is ineffective in these times. I also see how most major financial institutions are not properly doing the existing mark-to-market. Does anyone really believe the toxic assets are valued properly on most corporate books? These things are not being properly valued, which is another reason why we are not getting to a bottom. Until the valuations get real, we will not get there.

http://www.nakedcapitalism.com/2009/03/now-its-official-public-private.html

Disclosures: None

What Will Tomorrow Bring?

I have written here about what I foresee as the new reality. We are beyond using our homes as piggy-banks, beyond living off credit cards, beyond spending more than we make and beyond being totally stupid. We are being forced to come back to reality. In many respects, this is a good thing.

At the risk of dating myself, let me discuss my childhood. As a kid, I had very few toys; just a banana seat bike, a pogo stick, a maple tree in the front yard and a forest up the street. These were my tools for fun. Yes, we had a black and white TV, but we only had 3 or 4 channels, so it was not a major source of entertainment. Entertainment in my day was making a fort in the woods, swinging from a vine, jumping a brook or catching a red-faced turtle (we lived over the hill from a wild strawberry patch and turtles love strawberries). I loved my childhood and it had none of the things our kids seem to require today.

Kids aside, we can do with less. I was looking at getting a new TV this weekend and decided my old one will do for now. I know prices are good, but I also know that I can enjoy my current TV even though it has certain problems. We will survive. TV aside, there are more important things.

Today, I played basketball and baseball with my daughter. She is a great player. And we took a hike with our dog and my daughter rode her bike. No TV, no Internet, no modern stuff - just a walk (bike ride) down the road. We had a great time.

I realize the irony of me doing this post to my computer on my simplistic childhood, but the point is that the world - due to the recession - is changing. In the U.S. we are reverting to a less expensive more frugal time. The reality is that we need to stay here and get used to it. I, for one, am looking forward to building a fort in the forest with my daughter. Recessions bring the good and the bad. I am fortunate to have a home, food and all the necessities. For those that do not, I wish you the best. I truly do.


Disclosure: None

I Repeat, Are We Off The Bottom?

If you are alive and investing you have to be asking yourself whether the worst is over, whether this is a bear rally - is the dead cat bouncing - or are we on the way to recovery? All good questions and the true answer is anyone's guess, but some are better guessers than others.
I posted Wednesday that I do not think we are at bottom just yet. I wish we were, but the data seems to say otherwise. Reading today, Nouriel Roubini seems to agree, and he has better reasons than what I gave.

http://www.rgemonitor.com/roubini-monitor/255995/reflections_on_the_latest_dead_cat_bounce_or_bear_market_suckers_rally

Let me summarize some of his key points for those out there without a lot of time to read his sage words. First, with respect to the belief that economies are contracting at a slower rate (so the worst is over), he believes economies are not contracting at a slower rate:

"the latest data don’t confirm this relative optimism. In Q4 of 2008 GDP fell by about 6% in the US, 6% in the Eurozone, by 8% in Germany, by 12% in Japan, by 16% in Singapore and by 20% in South Korea."

My take is that the U.S. still has a good bit of hurt ahead and while it may be further into the curve than most countries, it cannot separate itself from the world. Even being ahead of most countries, we are still in for some hurt. Suprime is no longer the area of greatest concern as we are near peak pain there. Alt-A and prime delinquencies and foreclosures are mounting. Credit card debt (which admittedly is small compared to mortgages) is a double-edge sword. On the one hand the card debt is becoming more problematic. And on the other, credit card companies are significantly reducing credit lines, which is putting the pinch on some needing the credit, though reducing the prospect for those in trouble to get more in trouble. Commercial loans are yet another source of problems facing the U.S. Yet, despite all this, I think the U.S. is in pretty good shape compared to most countries.

The problem increasingly is not the U.S. but other countries that we deal with on a regular basis. Let's face it, we are globalized. Even if the U.S. is possibly reaching its own bottom, many areas of the globe are feeling much more pain and we are not immune to where they are going. We are not immune from pain in Eastern Europe, Russia, China, England, Germany or elsewhere. They sneeze and we need a tissue. Again, Nouriel details this better than me:

"The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression) with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capex spending around the world. And now many emerging market economies – as argued here for a while- are on the verge of a fully fledged financial crisis starting with Emerging Europe."

Now Nouriel continues to his second point, that the fiscal stimulus is not, well, very stimulating - as in not working. He describes it as pushing on a string. He notes in passing that some countries and regions, like the EU and Japan, are not doing sufficient fiscal stimulus compared to us. To me this is a significant point worth some focus as we can do all the stimulus in the world but if certain other key countries fail to do so, we are doomed to failure.

Nouriel also he notes that even the U.S. stimulus has little hope to stimulate this year. Of the $800 billion to be spent in the U.S. on stimulus, only $200 billion will hit the ground this year with the rest through 2010. There is a limit on how fast you can spend this money. And of the $200 billion to be spent this year, most will be tax rebates to people who will save it or use it to pay off debt (thank God individuals know what to do). Seriously, I think individuals need to save and pay off debt now, i.e. deleverage, rather than spend like there is no tomorrow - like Summers would like us to do:

"Of the $800 billion of the US fiscal stimulus only $200 bn will be spent in 2009 with most of it being back-loaded to 2010 and later. And of this $200 half is tax cuts that will be mostly saved rather than spent as households are worried about jobs and about paying their credit card and mortgage bills (of last year’s $100 bn tax cut only 30% was spent and the rest saved). Thus, given the collapse of five out of six components of aggregate demand (consumption, residential investment, capex spending of the corporate sector, business inventories and exports) the stimulus from government spending will be puny this year."

Nouriel's third point is on how most assert that the U.S. markets are oversold. He seems to disagree in the extreme:

"If you take a macro approach earnings per share (EPS) of S&P 500 firms will be – quite realistically in 2009 - in the $ 50 to 60 range (I say realistically as some may even argue that in a severe recession they could fall to $40). Then, the question is what the multiple, i.e. the price earnings (P/E) ratio will be on such earnings. It is realistic to expect that the multiple may fall in the 10 to 12 range in a U-shaped recession. Then, even in the best scenario (earnings at 60 and P/E at 12) the S&P index would be at 720. If either earnings are closer to 50 or the P/E ratio is lower at 10 then the S&P could fall to 600 (12 x 50 or 10 x 60) or even to 500 (10 x 50). Equivalently the Dow (DJIA) would be at least as low as 7000 and possibly as low as 6000 or 5000. And using a similar logic we argued that global equities – following the US - had another 20% plus downside risk.

These predictions were made when the S&P 500 was close to 900 and the DIJA was close at 9000. This basic macro approach was the reason why we argued that the latest bear market sucker’s rally – the one going from late November 2008 to early January 2009 – would fizzle out and new lows would be reached. Indeed, like previous bear market rallies of the last year this one went bust – falling over 20% - and the DJIA and the S&P broke below the 7000 and 700 upper limit of our range for US equities. With the DJIA and the S&P now well below the “7” range the next test for the markets may be 6000 and 600 for the two indices.
I have also argued that another bear market rally may occur some time in Q2 or Q3 of this year and may end up like the previous six. Indeed in the last 12-18 every time something dramatic happens (that leads to a lower stock market low) and the government reacts to it with a more aggressive policy action optimists come out and say that this is the dramatic and cathartic event that suggests that a bottom has been reached: they said that after Bear Stearns, after the collapse and rescue of Fannie and Freddie, after Lehman, after AIG, after the TARP was announced, after the G7 communique’, after the $800 fiscal stimulus package was announced last November (the onset of the latest sucker’s rally).
And after a while markets are again “shocked shocked” (to paraphrase the French police inspector in Casablanca) to discover that the macro news are much worse than expected in the US and abroad, that earnings news are much worse than expected not just for financials, realtors, home builders and consumer discretionary firms but also for most other non-financial firms, and that financial markets/firms shocks/news are worse than expected.

As repeatedly argued here these financial markets/firms worse than expected news are many: news that more and more financial institutions are effectively insolvent and will have to be taken over by the government; news that highly leveraged institutions – such as hedge funds – will be forced to deleverage further and thus sell illiquid assets into illiquid markets; news that even non-levered investors (retail, mutual funds, etc.) that lost 50% plus into equities are burned out and want to reduce their exposure to equities; and news that a number of emerging market economies are on the verge o a contagious financial crisis."

Nouriel goes on at length, more so than usual for him, about how we are not yet at the bottom of things. I used far fewer words, but I agree with him for most of the same reasons. The facts say a bottom is not here yet. I only hope I am wrong.

Disclosures: None

Are We Off The Bottom?

I just had a very fun time (not) traveling for three days and am glad to be back. Judging by the market, I should travel a lot more often. Markets did quite well while I was on the lamb.

I personally have had some nice gains in my equity investments over the past two days. Tuesday especially was a great day. Yet, I have to pose the question, is it sustainable? Let me add that I am among the masses looking for a bottom. I have no bets otherwise and have some equity positions that would benefit from a bottom. Moreover, individually I want this pain to be over. We all want it to be over. Yet, despite certain sucking wind companies announcing that they have made money the first two months of this year, you have to wonder.

Asian stocks are back in a downward direction after a few days of relief.
So those in Asia are not convinced yet.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aGhc55Gci19A&refer=home

And we all know the market, after some significant losses for the past two to three weeks were ready for any excuse for a bounce. The real question revolves around what do the facts reveal? The facts, I fear, are not pointing to a bottom.

Let's start with unemployment. Four states, including California, are now over 10%, and that is using the rather bogus official number that does not properly account for people who have given up for over 60 days, people with hours cut, people working part time who want to work full time and the like. Calculate these in and the number is several percentage points higher.

http://www.calculatedriskblog.com/2009/03/state-unemployment-rates.html

Tax receipts in the U.S. are falling off a cliff so the deficit is heading the opposite way. The falling tax receipts reflect the incomes of those in the U.S. and it is not a pretty picture. It is called an increasing budget deficit. I might add that the hunger for our Treasuries seems to be dampening just a bit, which spells as bit of trouble brewing.

http://www.marketwatch.com/news/story/Budget-deficit-widens-10-receipts/story.aspx?guid=%7BE595148D%2D3756%2D4F39%2DA1A6%2D773ABA0039A8%7D

We may be close to a bottom on subprime (though with underwater properties and job losses there could be more), but we have a long way to go on prime and Alt-A. These losses are increasing. But this wave to me will be small compared to the upcoming losses for commercial real estate, which is taking a major head-dive at the moment. Objectively, I do not see this as a positive.

http://www.calculatedriskblog.com/2009/03/bank-failures-and-c-loans.html

There is more but it is late and I am tired.

Disclosures: None

"off a cliff"

I am on the road this week. Fort Lauderdale today and tomorrow (my plane had to be de-iced in NH before leaving and it was 82 degrees when we landed - nice!) and then to Pittsburgh Wednesday. I will post what I can.

About a year ago I read an interview of Warren Buffet somewhere where he said he would be happy if all his stock holdings went down 50% due to the possibilities it would create. After all, he is not selling them so what does he care if their face value declines. He also likes to compare his stock holdings to his farm - if it goes down by half in value he pays no attention as he has no intention of selling. He is just living there. Well, he has to be one happy guy these days.

Nonetheless, the sage is saying things that sound a bit less rosy these days, after his company had its biggest loss ever (its second ever I believe) last year. He is now talking about the economy falling off a cliff and when we rebound having to deal with rampant inflation. That is one happy guy alright. He does, however, still have billions to invest so he should "eventually" come out of this smelling like a rose.

http://www.bloomberg.com/apps/news?pid=20601087&sid=acmiX_sr8yuc&refer=home

Too Big To Let Live

Here is an important piece from the head of the Federal Reserve Bank of Kansas City. He backs nationalization, or pre-privatization, in an orderly fashion and cites examples of how this has worked historically. Some key points he makes are that the efforts to save us to date have been scatter shot, poorly thought out and less than confidence inspiring. I for one hope the "stress tests" under way are a stealth way of preparing to do organized nationalizations.

I particularly like the quote on page 5 from economist Allan Meltzer who said "capitalism without failure is like religion without sin."

http://www.kc.frb.org/speechbio/hoenigPDF/Omaha.03.06.09.pdf

AIG -Still A Pain

AIG has Bernanke steaming and most taxpayers as well. Those in the business always had an extreme dislike for the good folks at AIG. Let's just say they were the 800 pound gorilla and they used their weight to get their way more often than not. If there was a way to game the system, they found it. So I have to say those in the industry are not shedding big tears.

Nonetheless, they have themselves so intertwined financially with so many other entities that they are able to convince the U.S. Government that they are indispensable. And so far, we are biting. Here is a highly confidential document where AIG explains to the government why it has to be saved. This is truly sickening.

http://www.scribd.com/doc/13112282/Aig-Systemic-090309

Disclosures: None

God Help Us All!!

Larry Summers, you know the Obama economic guru, is recommending that we all go out and spend to help the economy. We can save and pay down debt later. This, my friends, is the worst thing I have heard from the new Administration yet. Obama at least said it in logical terms like spend prudently and do not start stuffing cash into a matress foolishly.

http://www.calculatedriskblog.com/2009/03/summers-universal-demand-agenda.html

A quick spending spree is not going to save us from a multi-year recession, perhaps depression. Right now we are entering into a prolonged downturn. I know some are questioning my use of "entering" but I fear we have a ways to go. Either way, the question is what is the best way to deal with it.

Let's say you have had a band-aid on for a week and now you need to remove it. Do you peel it off slowly or rip it off? I am in favor of the latter. This means that individuals drastically reduce spending and increase savings, that our homes are not piggy-banks, that we put off purchases and hunker down a bit. I have been saying hunker down for over a year now and folks are waking up.

Now I do not need to tell people any more to hunker down. With job losses and job uncertainties people are afraid to spend. They need to save and pay off debt and out of fear they are doing it. Nonetheless, we need to get to a place where we spend prudently out of habit, not fear, and this prudent spending will lead us back to an economy unlike what we have built. The economy will be smaller and more efficient.

Yet our government wants us to spend without reason other than supporting an overbuilt economy. They built an economy to cater to a U.S. living off debt and now we will not/cannot do so. The answer is not for people to keep foolishly keep spending beyond their means. The answer is to shrink what we have built, to let businesses go under, to return to what should be reality. The sooner, the better.

All this is a discussion on whether the recession will become a depression and on whether it will last 5-10 years or a generation - and I say this seriously. We are looking at the potential for a generation of pain if we do not tread properly. We need to reduce debt on all levels, including individial, correct our ways and find the new economic reality. Where do we belong?

Disclosures: None.

Oil Price Manipulation

Bloomberg reports that crude oil could return to $50 a barrel as OPEC cuts production. Now I have to mention they were not cranking up production when oil was at $147 a barrel, but they are good at cust on the other end of the spectrum.

Nonetheless, I just read last week that inventories are at almost peak capacities, oil tankers are full and sitting at docks and the glut in the market is incredible. Even with cuts the price should not go up any time soon. It is truly amazing that the prices are as high as they are, but me thinks something stinks. There are various links in the pipeline between the oil coming out of the ground to getting into your car and I suspect there are several places where the pipeline is getting squeezed, like at refineries.

Overall, there seems to be plenty of oil out there at the moment, so why would cuts by OPEC make a big difference anytime soon? If you know, you tell me.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aP2gWI8POYac&refer=home

Disclosures: None.